I've been Beijing bureau chief for Forbes since 2007, writing about insider trading, art market manipulation, corrupt journalists, brave lawyers, the Google kerfuffle, what Tencent has figured out that Facebook hasn't, and awful books on doing business in China. I have also impersonated mustachioed pundit Tom Friedman, traveling White House reporters, Chinese propagandists and China experts. I pontificate on China and mock others on Twitter and in public wherever there is a working microphone and a gullible audience. Before coming to Forbes, I was Beijing bureau chief and international projects reporter for The Baltimore Sun, where I won a Gerald Loeb Award for Distinguished Business and Financial Journalism for co-authoring a series on globalization. My high moments in television include making a two-second cameo on HBO's The Wire and appearing on The Daily Show to speculate about China's plans for world domination.

8/16/2010 @ 1:47AM4,885 views

This Just In: China Economy Doing Better Than Japan

We are greeted today with screaming headlines about China’s economy surpassing Japan’s in size. There is both more and less to this story than meets the eye. We have slightly different takes in today’s New York Times and Wall Street Journal, both marking the milestone that China’s 2nd-quarter economic output exceeded Japan’s. The NYT leads it off this way:

After three decades of spectacular growth, China passed Japan in the second quarter to become the world’s second-largest economy behind the United States, according to government figures released early Monday.

The WSJ notes more conservatively, as the NYT does not, that “China’s output has topped Japan’s before, in the last quarter of the year, when the Chinese economy tends to run hotter for seasonal reasons. Outpacing Japan in an early quarter is seen as a good indication that China has the momentum to zip past Japan for the full year.”

So, has the country that brought us Toyota, Honda and Sony fallen behind the country of Petrochina, Sinopec and Bank of China? Japanese officials downplayed today’s news, noting that one quarter does not history make. But do we really need a quarterly statistic to tell us anything we don’t already know about these two economies? There is not much value in debating the matter other than for the fun of the headlines and the hype.

We already know that China is the world’s second economic center of gravity now after the U.S., and in important ways is the dominant center of gravity: It has long been the economy that draws every big company in the world seeking growth, and which sets global markets in most commodities, as the New York Times story points out. When China, growing as quickly as it does, becomes a net importer of something, that is the vital turning point for prices going forward, and it didn’t take until the second quarter of 2010 for this to become true. This has been true for most of the last decade.

There are at least two more reasons not to get too excited. One is minor, which is that in truth, we don’t have a clear picture of China’s real economic output. The quality of data coming out of the economy remains poor. As one very smart, rigorous analyst of China’s economy told me last week — unfortunately I can’t use his name — we don’t really know the actual GDP even within a modest margin of error, we just have to sort of hope the official numbers are in the right ballpark. That means we don’t really know when China’s economy surpasses Japan’s in reality, just when the official numbers say so.

The poor quality of data is an important issue for Chinese policymakers, but I consider this a minor point in this particular context because it doesn’t change what I’ve written above. China’s world-changing gravitational pull as an economy is undeniable, no matter the economy’s actual size, and what happens to the Chinese economy in the coming months and years is of more importance to the rest of us than what happens to the Japanese economy. This, too, has been true for quite some time.

That brings us to the second point, which I hand over to Michael Pettis, who wrote this last week on his fine, informative China Financial Markets blog:

…before we get too excited about China’s overtaking Japan, we should remember that this has as much to do with Japan’s astonishing decline as with China’s astonishing rise, and that there is at least some small chance that the policies responsible both for Japan’s breakneck rise and equally breakneck decline may be being replicated in China.

In other words, this is a story of Japan’s fall from grace just as much as it is of China’s rise. The tale of China’s rise has played out differently from Japan’s boom of yesteryear. But we should remember Japan’s seeming invincibility in the 1980′s and the stunning two decades of stagnation that followed when we look at China now. If you want to take a more sober look into China’s future, read the rest of Pettis’ post here.

Of course, that doesn’t mean I’m betting against the Chinese economy. No matter what the numbers say, right now it’s doing better than Japan’s.

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I’ve provided some reasons to be bearish long-term, yes, but have also disagreed plenty with ultra-bears like Gordon. I think there are obviously challenges in the years ahead, but I also don’t underestimate the Chinese govt’s will to respond. .. I’m thinking maybe a blog post about “China bears” is in order at some point.

So we really cannot rely upon Chinese economic data for its accuracy being within a statistical error range for coming to any conclusion at all? Does anyone really think that it will make much difference as far as the popular image of China becoming No.2 will make? Politicians across the globe will accept it as fact and continue to try and squeeze more out of their economies to keep pace with a No. 2 China that may not be No.2 at all. But that’s the ‘Good News’. The ‘Bad News’ is and what the U.S. should be more concerned about is the huge amount of Foreign Direct Investment that its own American capitalists, like the billions Warren Buffett have poured into China and not invested in their own USA, in so dire need of these funds.

The Bush tax cuts made it possible for Buffett and many others like him to transfer American Capital to China, a Communist run economy, if that’s not aiding and abetting the enemy, then I gotta get myself a new dictionary! Future tax cuts to the U.S. investment class must be predicated on this capital being put right back into U.S. industry. What a joke when CNBC tries to tie together the hundreds of billions that Bush and Co. used to bail out banks with an ongoing stagnant U.S. employment rate. I have not seen anyone trying to demonstrate that all that bailout money actual went into U.S. industry and not into more offshore FDI. Time we stop making heroes out of Buffett and others who make their billions on taxpayers money invested in China and other foreign shores.